Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

United Technologies Corp. investors heard some good news Tuesday, but they were too preoccupied with what the company didn't say to cheer it very much.

The $97 billion maker of jet engines and air conditioners reported better-than-expected second-quarter results and raised its 2017 revenue and profit outlooks. That's great, but some kind of guidance lift had been anticipated and United Technologies kept the high end of its range in place, saying it doesn't expect to surpass $6.60 in EPS this year. That would represent a decline from the previous year as the company works through the investment costs entailed with rolling out its new geared turbofan jet engine and dealing with the durability and supply-chain growing pains that have haunted it so far.

Great Expectations
Analysts were already expecting United Technologies to raise its guidance
Source: Bloomberg
Note: United Technologies forecasts $6.45 to $6.60 in 2017 EPS and $58.5 billion to $59.5 billion in 2017 revenue. The data shown in the chart reflects the midpoint of those ranges.

What everyone really cares about (barring major disasters at other parts of the sprawling conglomerate) is whether deliveries of the new engine are keeping pace and putting the company on track to reap the profit recovery that should come as the program matures. United Technologies spared investors any major bad news this quarter. But its progress is only incremental and Wall Street is growing antsy. The lingering uncertainty seems to have been too much for investors, too, with the stock dropping 2.5 percent as of 10:30 a.m. in New York. 

Analysts have tried multiple times to goad management into making early 2018 predictions on the program's profitability, something executives largely avoided on Tuesday, at least as far as specifics. At one point, CEO Greg Hayes joked, you keep trying and "we keep saying we're not going to tell you." 

Here's what the company did say: it delivered 134 of the engines in the first half of 2017 (it built 145). That gave CFO Akhil Johri the confidence to call its goal of 350 to 400 deliveries for the full year "very doable." Meeting this goal is key because it keeps the company on track for a target of 1,000 by 2019 and would help alleviate anxiety that the program may not be as fruitful as promised. An adjusted operating margin of 10 percent for the Pratt & Whitney unit that houses the jet engine bested the average of four analysts' estimates compiled by Bloomberg, albeit just barely.

In Need of a Push
United Technologies is trading at a premium to its five year average on a multiple of projected Ebitda. Investors need to be confident about the new jet engine to take the stock higher.
Source: Bloomberg

Company executives said they still expected 2018 to mark the bottom for the negative margins on the new engine and are on track for longer-term profitability goals, but they weren't interested in commenting on just how low things might go next year before this recovery happens. They acknowledged that United Technologies is playing a bit of catch up this year to drive down costs after getting sidetracked by investments to fix the early snafus with the engine.

Patience never was a strong suit for shareholders. Just imagine if an activist were involved. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net